tv Nightly Business Report PBS July 23, 2010 7:00pm-7:30pm EDT
>> tom: banks in europe take a stress test, but seven don't make the grade. >> when you fail only seven banks out of 91, there's a lot of questions raised. >> susie: we'll examine what those questions are, and why some are calling whole process a failure. you're watching "nightly business report" for friday, july 23. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by:
this program is made possible by contributions to your pbs station from viewers like you. thank you. captioning sponsored by wpbt >> tom: good evening and thanks for watching. the report card on european banks is out, and most of them passed the test. susie, 91 institutions went through the stress tests, and only seven failed. >> susie: that news boosted investor confidence, tom, and stocks on wall street rose across the board. investors were relieved that most european banks are in good financial shape. >> tom: but despite the passing grades, there are still questions tonight about the credibility and methodology of the tests. scott gurvey reports. >> reporter: the 91 banks tested
by european regulators represent 65% of the total assets of the e.u. banking sector as a whole. the test required the banks to assume a severe economic downturn, and then measured to see if they could still meet capital requirements. regulators from 20 countries designed the tests and many of the details remain secret. one german bank failed, hypo real estate holding a.g. a second, atebank, is in greece. five banks in spain failed the test, but there were no failures in any other country. scott macdonald of aladdin capital, says the results were much better than expected. >> i think it was a constructive step that was put into place. the hurdles though were very low, and you've left a lot of room for uncertainty still to play out in the markets. so today, you had a big sigh that it was not as bad as people thought it was going to be. but when you fail only seven banks out of 91, there's a lot of questions raised. >> reporter: the questions were raised the minute the results became known.
many critics challenged the test's methods, saying that the process minimized the risk of sovereign debt defaults. and there were complaints that very little information was actually revealed about the banks, leaving investors uncertain of their individual strengths and weaknesses. others argued that by focusing on available cash reserves, known as tier one capital, the european test, like the one conducted by the federal reserve in the united states, was easy to pass. banking analyst dick bove says it also had other undesirable consequences. >> the government, and the regulators, and the central banks have all decided that tier one is the way to go. and the banks know the way to succeed under tier one is to build up their cash dramatically, to buy government securities dramatically and to stay away from lending money dramatically, what have they done to the economy? they've made it far more difficult for the economy to grow. >> reporter: the stress test results were released after european markets closed, so
traders there will have the weekend to mull over the data. most of the analysts i talked to think those traders will be unhappy. scott gurvey, "nightly business report," new york. >> susie: from european banks to american ones. a new report shows 17 banks paid their execs more than a billion and a half dollars during the height of the financial crisis. the obama administration's special master on pay, kenneth feinberg, has decided those payments were "ill-advised," but not illegal. stephanie dhue talked with feinberg this morning and asked him about that decision. >> they were too big, some individuals were getting in excess of $10 million in bonus payments over a five-year period, there were severance payments where individuals, companies, after they received tarp, we're paying people walking out the door, no longer working at the company, there were gross-ups, where in order to cover tax payments, there
would be additional money, allocated to these individuals, we concluded after months of review, these companies should not have done what they did. >> reporter: six banks that made what feinberg calls "ill- advised" payments still owe taxpayers. they are citibank, c.i.t. group, which has since gone through bankruptcy, suntrust, regions financial, m&t bancorp and a.i.g. 11 repaid tarp, including j.p. morgan chase, bank of america and goldman sachs. none of the banks rescinded those payments. feinberg says he didn't think he had the authority to demand the money back. >> at the time these payments were made, as ill-advised as they may have been, they were not in violation of a statute, they didn't violate any regulation, of the treasury or the s.e.c. or anybody else, at the time they were made, it was bad judgement, 11 of the
17 companies had already paid the money back with interest. i thought to trigger that phrase would cause additional problems for these companies that would be unfair. >> reporter: feinberg's report is prompting a new round of calls on capitol hill for bailed-out banks to repay the bonuses. damon silvers is with the afl-cio and sits on the tarp oversight board. he says feinberg didn't hit hard enough the big issue, whether it's fair for executives to get big payouts when things go bad. >> i think that both from a policy perspective and in terms what the public wants in terns of accountability is that we need to be a little more blunt. >> reporter: feinberg wants the firms to adopt a break provision, letting boards break contracts in a financial crisis. >> if there's one argument that i've heard in my 16 months on the job, is that we are legally obligated, we have a contract, we have to pay them, we don't
have any choice, this break provision, if adopted by the companies would prevent that argument, by allowing boards to say legal obligations not-with- standing, we're not paying. >> reporter: most banks had no comment. citi and a.i.g. say they will work closely with the special pay master, an industry group says banks will review feinberg's recommendations. stephanie dhue, "nightly business report," washington. >> tom: here are the stories in tonight's n.b.r. newswheel. investors breathed a sigh of relief over the those european bank stress test results. the dow jumped 102 points, the nasdaq added 23 and the s&p 500 rose nine points. big board volume fell just a touch. the pace of trading on the nasdaq edged slightly higher from yesterday. now, tropical depression bonnie is forcing b.p. to temporarily suspend efforts to kill its damaged well in the gulf of mexico. the storm is expected to reach the gulf tonight, and oil prices
dipped as worries eased about bonnie's potential damage to gulf oil operations. in new york trading, september crude fell 32 cents, closing at $78.98 a barrel. still ahead, tonight's "market monitor" says investors are focused too much on pessimism in the economy. he's ernie ankrim, senior market advisor at russell investments. >> susie: the white house said today the budget deficit will reach $1.47 trillion this year. that's $100 billion less than the administration's estimate in february, but still it's the largest budget shortfall in u.s. history. our guest tonight has been appointed by president obama to serve on a special commission to reduce the nation's deficit. alice rivlin joins us now, she is also senior fellow of the brookings institution. >> good to be here, susie. >> susie: alice, when you look at the forecast of the white house, and looking out, it is expecting the deficit, it
will be able to cut the deficit by half a trillion dollars over the next two years, by the year 2012. that works out 10% of g.d.p. now down to 5.6%. does that seem doable to you? >> i think it is doable if the recovery doesn't falter. the assumptions behind this drop in the deficit are that the economy does recover, grows moderately this year, and continues to strengthen. i don't think that's unreasonable, although there is some reason recently to doubt how strong the recovery is. but on those assumptions, much of this deficit, and it is very, very large, is related to the recession and to the temporary spending that we had to do to mitigate the recession. so it is reasonable to assume that that will diminish as the economy recovers. but --
>> susie: let's look at the economic assumptions because today the white house put out what their economic assumptions are, and in terms of g.d.p. growth and how the economy grows, they're expectly the economy to grow 3.2% this year, and 4.2% by the year 2012, and when you look at the unemployment rate, they think it will be 9.7% at the end of this year. and down to 8.1% in 2012. do those numbers sound about right to you? and what if it doesn't work out that way? what does it mean for cutting the deficit? >> those numbers don't sound unreasonable. but, as i said, if it didn't work out that well, if unemployment falters, then, of course, the deficit will stay high. that isn't so worrisome, the deficit part of it. the economy faltering is clearly worrisome.
but as long as the deficit is related to the recession, it is not such a big problem because it will recede. but it doesn't go back to zero or anything close to balance. as you say, even after the economy is pretty well recovered, we still have large deficits. and then by the end of the decade, they begin to go up again. that's the really worrisome part. because that's when the impact of the aging of the population, and the continuing rise in the cost of medicare begins to affect the deficit seriously, and there is no end to that. that means we're looking at rising deficits over the next couple of decades. >> susie: so this is a big project to cut this deficit, or at least to get it to a manageable size. some people are saying -- the question is: when is it safe to start cutting
the deficit. some people are saying when the economy is as fragile as it is right now, we should wait a couple of years. and even ben bernanke said in testimony this week, make wait a few weeks to cut on it. when will the economy be strong enough to cut deficits. should we get going on it right now? >> we should get going right now. we should have a plan. that's what this commission is for, to give the president and the congress a plan for cutting the deficit. now, that will be a long-run plan. what are we going to do to reduce the rate of spendi and get more revenues over the next 10 or 15 years. and it should be enacted enacted soon so people know that it is serious. but it doesn't have to derail the recovery. nobody in their right mind, i think, would want the deficit to plunge right now by actions of congress to cut spending drastically, or to raise
taxes. >> susie: all right. >> because that would derail the recovery. >> susie: well, this is a subject we'll revisit. i understand your commission is going to make its recommendations in december, and i hope you'll come back and we can talk more about the details of your plan. thank you so much for coming on tonight. >> happy to. >> susie: and we've been talking to alice rivlin, she is the member of the president's national commission on fiscal reform, and senior fellow at brookings. >> tom: the first peak week of
earnings is in the books, and this week's market direction was up. let's take a look in tonight's "market focus." 15 of the 17 reporting have turned in better-than-expected profits. here's what that did to the dow this week, pushing it up more than 3%. with this rally, the dow is now even on the year. the nasdaq jumped more than 4% this week. it also is unchanged for the year. and the s&p 500 added 3.5% over the past five sessions. this week was marked by scores of financial report cards. two dow components reported today. one was the best performer for the index, the other the worst. verizon was the leader, up almost 4% on heavy volume. shares are at a three-week high tonight. the buying came as verizon beat estimates after ignoring the cost of an ongoing employee buyout program. verizon wireless added more customers during the quarter than at&t, which has the iphone.
mcdonalds' earnings were a penny better than estimates. still, its chief operating officer called the global economy fragile. one worry is european government budget cuts will hurt consumer spending there. mcdonalds was the biggest loser of the dow, falling 2%. still, the stock is less than $2 off an all-time high. one more note from a dow component. general electric has returned to the camp of raising dividends. it's the first hike since the historic cut to its shareholder payout more than a year ago as it came to grips with the credit crunch. that and a stock buyback announcement helped g.e. shares rally 3%. another household name that continues to show a rebound, ford. earnings beat the street as ford was able to sell more vehicles at higher prices, a potent combination for its balance sheet. speaking of, it continues to pay down its debt. ford stock jumped to its highest price since early may, moving on the firm thinks 2011 results will be better than this year. it wasn't all about beating the street, there were some bottom- line misses. auto parts maker johnson controls doubled its earnings from a year ago, but that still was a disappointment. shares dropped 4%.
biomedical firm beckman coulter lost a fifth of its value after earnings fell short, and the old a&p hit a new low after an earnings miss and management shake-up. beyond earnings, there was talk of a possible deal in biotech involving genzyme and french drug maker sanofi-aventis. the chatter sent shares of genzyme skyrocketing, up more than 15 percent to a new 52-week high. the "wall street journal" calls it an informal approach to genzyme by sanofi. genzyme's market value, with this rally, is close to $17 billion. shares of sanofi fell on the speculation, dropping on four times its usual volume. three i.p.o.'s started trading this week, with mixed results. green dot sells pre-paid debt cards. it came public on thursday at $36 per share and continued climbing today. ameresco focuses on energy efficiency services. it's thursday debut was at $10, near its close tonight. and camelot information systems has a very british-sounding name, but is a chinese software
services company. its i.p.o. price on wednesday was $11. it remains below that this evening. and that's tonight's "market focus." >> susie: a new lesson plan for the nation's for-profit schools; the department of education issued new rules on student loans today. those rules will curb federal financial aid at schools where most students don't pay back what they borrowed. the tighter controls come amid increasing concern that some for-profit schools issue expensive, but worthless, degrees. darren gersh reports.
>> reporter: to qualify for federal aid, for-profit career colleges are required by law to prepare graduates for what's called gainful employment in recognized occupations. but gainful employment has never been defined, until now. the department of education says it comes down to two things. first, a repayment test, that 45% or more of graduates at a for-profit college actually repay their loans. second, a debt-to-income test. so that, on average, graduates pay no more than 8% of what they earn or, 20% of their discretionary income, on student loans. schools that fail these tests would have to issue warnings telling new students they might have trouble repaying loans. the government could also limit enrollment and federal student loan programs. barmak nassirian, a critic of for-profit education, is encouraged by the new rules. >> it is very much a step in the right direction. i do think that it will provide some measure of protection for students and taxpayers.
i'm not sure that it's as robust as perhaps it ought to be. >> reporter: the for-profit education industry argues the new regulation could force schools to cut programs, harming students. in an interview last week, career college association president harris miller argued against a specific debt-to- income ratio. >> i think it's a simplistic and wrong-headed way to approach the question of whether students are going to get a good return on their investment and taxpayers are going to get a good return on their investment. >> reporter: nassirian says the new rules will crimp industry profits, but they don't address whether for-profit education provides much real value. >> it essentially suggest that, as long as people pay up, the government will not delve into whether they were ripped off or not. >> reporter: miller says millions of students clearly think they are getting a good education they couldn't find at community colleges or public universities. >> if schools aren't doing a good job of both getting their students through the program and onto graduation and aren't doing a good job of getting students
placed in the careers for which they've been trained, that will kill your school, that will kill your reputation. >> reporter: once the rules are in place, the department of education estimates one out of every 20 for-profit programs won't be allowed to offer federal student aid, and more than half will have to warn students they may end up with more debt than income to pay it back. darren gersh, "nightly business report," washington. >> tom: here's what we're watching for next week: our friday "market monitor" is marshall front, chairman and chief investment officer at front barnett associates. we'll see quarterly results from oil giants b.p., chevron and royal dutch shell. and monday, ford unveils its new explorer. the updated s.u.v. is expected to be smaller and more fuel efficient than older models. >> susie: mark your calendars for the week of august 16. that's when general motors will file the paperwork to go public, according to reuters. the automaker reportedly wants to complete its i.p.o. before november's general elections,
trimming down uncle sam's $50 billion ownership stake. experts say a g.m. public offering could be the largest ever domestic i.p.o., bigger than the current record holder, visa. its public offering two years ago almost topped $20 billion. >> tom: disgraced media mogul conrad black is staying in the u.s. for now. a federal judge today ordered him to surrender his passport, nixing his hopes to return to his native canada. black was bailed out of prison wednesday after serving part of a 6.5-year sentence for defrauding investors in his company, hollinger international. that conviction is now being re- examined. the judge wants black to come up with details on his finances before he can travel to toronto.
a fragile economic recovery has investors too focused on the worst-case scenario, so says tonight's "market monitor." he's ernie ankrim, senior market advisor for russell investments. he joins us from tacoma, washington. >> thanks, tom. it's my pleasure. >> tom: so why do you think investors are focusing on the pessimism in the market? >> you'd understand with what we've been through in the last couple years, this meets be another bad news story. certainly what has
happened in europe, and following the worst recession in our country's history since the 1930s, people would be fully allowed to be weary of risk. >> tom: on the other hand, what's the case fof optimism. >> the economy has been growing. we're in the 11 month of zero industrial production growth. unemployment has stayed stubbornly high, but woor looking at an economy that will continue to grow through 2011. this is not the type of environment the type of multiples we're seeing on stocks would happen. >> tom: do you think like today's exercise like the stress test on european banks hips or hurts? >> we'll see. we'll look at overnight lending on the banks and see if they believe it. clearly the disclosure on the underlying elements will help. at some point, it will be show me with evidence. if interest rates stay
small and flows are going well, that will be what really convinces people. >> tom: the evidence for the united states companies this week were earnings. does that make you feel more comfortable with stocks, what you're seeing? >> i think part of it. i like the earnings. i'm especially encouraged by some of the guidance by some of the companies. general electric buying back, and u.p.s. as a guidance drives more from the u.s. >> tom: the last time you were on "nightly business report" was in june 2009. nike up 25%, and lockheed martin done by 23%, and goldman sachs, only down by 1% since you first chose it. do you like this trio still? >> right now or manages are at about neutral on lockheelockheed and goldman
sacks. >> tom: broadcom, best known for making some of the guts of the ipad for apple. a new 52-week high. are you willing to put money to work at these levels? >> it is tough, but if you look at the rate of the earnings over the last 24 months, even when apple has done. you see the multiple they're commanding is relatively modest. if the earnings come in next week, monday they announce, they could be looking at a p.e. of 24. that seems like a great deal. >> tom: what is going on with energy, with the b.p. oxi, o.x.y., is a domestic way to play oil. >> that's exactly right. tom, recognizing that globaoilis a global economy. certainly what is going on in china makes any oil, no matter where, trade to the market price.
oxy is in a great position to enjoy that. >> tom: pepsi is another one of your choice. what makes you like pep? >> it's reliable. it's got a great dividend, and it actually sells more chips than money off of their beverages, so you've got to like that. >> tom: frito lay, not pepsi. any exposures? >> i hold them in mutual mutual funds, but i hold into individual caption test caption test caption test >> susie: that's "nightly business report" for friday, july 23. i'm susie gharib. good-night everyone and have a great weekend. "nightly business report" is made possible by: